Tax incentives for IT companies in the tax law of the city of Diia
Ukrainian Parliament takes both measures to facilitate the growth of innovative companies and attract foreign investment – Framework law of the city of Diia and Tax law of the city of Diia.
The first law  introduces the legal regime for innovative companies called “Diia City” (reads in Ukrainian like “Action City”). The state guarantees its validity, terms and conditions for the next 25 years.
The second law  establish tax incentives for IT companies and their employees registered with Diia City (the “”CC Residentsâ) – IT outsourcing, software development, games, robotics, cybersecurity, digital marketing and other businesses. Established businesses and startups (up to 24 months after incorporation) can become residents of DC. Wherein, startups are subject to lower requirements.
Corporate tax incentives for residents of the city of Diia
Under the new legislation, residents of DC can opt for a “DC tax regime â and pay corporate income tax, also known as CPT, only on distributions (distributed profits such as dividend, interest or royalty payments, payments to non-profit organizations, loan extension at zero rate, etc.).
Distributions are subject to a CPT of 9% in Ukraine at the DC resident level. In the event that distributions are made to non-residents, these amounts may also be subject to Ukrainian withholding tax at a general rate of 15%, unless a reduced rate or exemption is available under the convention. of Ukrainian double taxation applicable (Ukraine has 74 double taxation treaties in Obliger).
At the same time, the DC resident can opt for a general tax regime and be subject to a CPT of 18% on the profit determined on the basis of his accounting financial result as adjusted under the Tax Code of Ukraine.
The requirement to qualify for the DC tax regime – DC resident must employ at least 9 specialists (“DC Employees”) either under ‘concert contract ‘ or by the Labor Code.
“Concert contract” is a new concept introduced by the framework law of the city of Diia. Unlike well-known service contracts, this contract also provides basic social protection to the entrepreneur – paid vacation, sick leave, maternity / paternity leave, etc.
DC employees will have a gross monthly salary of at least 1200 EUR (jointly the “”Conditions of employment“). The terms of employment do not apply to startups within a âgrace periodâ of up to 24 months after incorporation of the DC resident. The monthly salary of DC employees will be subject to a 6.5% effective tax rate.
As an employer, DC Resident must also pay a unified social contribution (“USC“) at 22% rate on wages, but still in the minimum and maximum brackets per employee (the brackets are linked to the real rate of the minimum wage in Ukraine, which is changing):
- minimum – 1320 UAH (around 50 EUR)
- 1200 euros monthly salary – approx. 7 930 UAH (264 EUR)
- maximum – 19,800 UAH (about 661) EUR
Subject to compliance with the conditions of employment, in addition to DC employees, other DC resident specialists may be engaged under service agreements with individual entrepreneurs registered in Ukraine. The income of individual entrepreneurs will be subject to a 5% effective tax rate, and individual entrepreneurs can choose to pay USC at a minimum threshold level regardless of the amount of income.
It should be mentioned that the DC tax regime establishes a safeguard against tax abuse of the employment structure with individual entrepreneurs. In which, as of 2024, DC residents’ expenses for sole proprietorships exceeding 50% of all expenses in the previous tax year are considered taxable distributions to the CPT; and in 2025, the above threshold is reduced to 20%.
Diia city timescale
Once the tax law of the city of Diia comes into force, the stakeholders of the city of Diia will be able to benefit from the DC tax regime. Therefore, the law on tax on the city of Diia has yet to pass the second reading in parliament and be signed by the President of Ukraine.
In the meantime, Diia’s tourist tax bill provides that it will generally enter into force on January 1, 2022, with the exception of certain provisions that come into force on January 1, 2024.
The Ukrainian IT sector is growing rapidly and is full of highly qualified professionals comparable to the level of the EU market. Meanwhile, the cost of product development in Ukraine is much lower than in the EU and the US. These major reasons are driving an upward trend for the establishment of IT back offices of major global IT players in Ukraine.
The introduction of the Diia City framework is another impetus to reinforce this trend.
In this regard, being a full-service law firm with a head office in Kiev, INTEGRITES is happy to answer all questions related to the opportunities of the city of Diia, including:
- meet the requirements of the city of Diia
- specific advantages and opportunities of the city of Diia available to companies
- apply for the Diia City diet, and more